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The Kauffman Foundation in Kansas City, MI is to be commended for the open manner in which they’ve shared the results of their own venture capital (VC) investing. In a remarkably candid appraisal that covers twenty years of experience, the authors reveal that much of the conventional wisdom about this area of private equity is wrong.

Larger funds reliably underperform smaller ones; fees eat up disproportionate chunks of performance; investors too easily sign up for second tier managers in order to deploy capital that’s “burning a hole in their pockets” while top tier funds seem to be the only way to justify the risk (as long as they don’t grow too big).

The authors, who include CIO Harold Bradley, note with irony that while venture capital funds search tirelessly for new business models and innovation there has been remarkably little of this in the vc industry itself. Fees of 2&20 with limited transparency around GP compensation have prevailed with remarkably little change. The report also notes that while vc funds demand complete transparency around the financials and compensation of the companies in which they invest, they generally refuse to provide anything similar to their own investors.

Kauffman reports that only 20 out of their 100 vc funds beat a public equity market equivalent by more than 3% (a modest reward for illiquidity) and that half of those began investing prior to 1995. They also find that the “J-curve” (which holds that early negative returns quickly improve as investments mature) doesn’t really exist.

In many ways what’s wrong with vc investing is similar to what’s wrong with hedge funds. Their findings echo my book, The Hedge Fund Mirage. Too much money chasing returns; LPs that don’t press for better terms. Poor transparency.

The Kauffman Foundation should be applauded for their open approach to discussing issues that demand more attention. I hope their step forward provokes other investors to similarly examine their own results.